Barriers to Change, From Wall St. and Geneva

EVEN now, after all we’ve been through, something is still wrong with Wall Street.

That’s the takeaway from the extraordinary — and extraordinarily public — resignation of Greg Smith from Goldman Sachs last week. His criticism of Goldman, made in an Op-Ed article in The New York Times, suggested that some of the business practices and inherent conflicts in the financial industry are as troubling today as they were before all of those taxpayer bailouts.

Goldman disagreed with him, of course. But Mr. Smith’s Op-Ed article — and the resounding response to it — provide yet another reminder of why it is crucial that we remake our financial markets so that they are safe for investors and taxpayers.

And yet, the snail’s-pace progress of this effort is worrisome. Financial institutions, eager to maintain their profitable status quo, have lobbied hard against change. As a result, too-big-to-fail institutions have become even bigger and more powerful.

In addition to lobbying, big financial players have another potential weapon in their battle against safety and soundness. This one is more hidden from view and comes from, of all places, the World Trade Organization in Geneva.

Back in the 1990s, when many in Washington — and virtually everyone on Wall Street — embraced the deregulation that helped lead to the recent crisis, a vast majority of W.T.O. nations made varying commitments to what’s called the financial services agreement, which loosens rules governing banks and other such institutions.

Many countries, for instance, said they would not restrict the number of financial services companies in their territories. Many also pledged not to cap the total value of assets or transactions conducted by such companies. These pledges also appear to raise trouble for any country that tries to ban risky financial instruments.

According to the W.T.O., 125 of its 153 member countries have made varying degrees of commitments to the financial services agreement. Now, these pledges could easily be used to undermine new rules intended to make financial systems safer.

What would happen if a country flouted the rules in an attempt to reduce risks in its financial system? Possibly nothing. Then again, that country could find itself subject to a challenge by the W.T.O.

So far, no countries have asked the organization to challenge rule changes like those made in the United States under the Dodd-Frank law. But rumblings of such an objection emerged in late December, in a comment letter sent to United States banking regulators. That letter criticized elements of the Volcker Rule, which is intended to prevent financial companies from making bets for themselves with deposits backed by taxpayers.

The letter went on: “As a result, the Volcker Rule may contravene the Nafta trade agreement,” a reference to the North American Free Trade Agreement, which has a broadly similar set of rules to the financial services agreement under the W.T.O. While countries must ask the W.T.O. to mount a challenge under its rules, companies can do so directly under Nafta.

Some countries that are trying to reregulate their financial systems worry that they may run afoul of trade commitments. The delegation for Barbados, for example, wrote last year about the trouble it might encounter imposing new rules while trying to abide by trade agreements.

Yet nations that committed to the agreement in the 1990s “may find restrictions on size are contrary to the commitments given to limit adverse affects on financial service suppliers,” the Barbados letter said.

Barbados suggested amending the agreement on financial services to provide more flexibility. Its proposal was rejected.

Last October, Ecuador asked that the W.T.O. review financial rules so that the country could preserve its ability to create regulations that ensure “the integrity and stability of the financial system.”

Sounds reasonable enough. But that proposal was rejected by trade representatives for the United States, the European Union and Canada before it could be discussed at a December meeting in Geneva. Through a spokeswoman, Ron Kirk, the United States trade representative, declined to comment.

Maybe nothing will come of any of this. But such trade agreements might well be read as an invitation to fight financial regulation.

One passage, for instance, begins sensibly enough: “A member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system.”

Then it does a U-turn. “Where such measures do not conform with the provisions of the agreement, they shall not be used as a means of avoiding the member’s commitments or obligations under the agreement.”

AS the Barbados delegation wrote in its February 2011 letter, “An obligation not to restrict financial services in a situation where a member wishes to do so could be interpreted as having the intention of avoiding that obligation.”

All this represents yet another paradox of our financial world: Even as our regulators try to devise a safer financial system, our trade representatives thwart efforts to reduce risks these operations pose to taxpayers.

Leadership, Mr. Smith wrote in his Op-Ed last Wednesday, is about “doing the right thing.” That applies off Wall Street, as well as on it.

A version of this article appears in print on March 18, 2012, on Page BU1 of the New York edition with the headline: Barriers to Change, From Wall St. and Geneva. Order Reprints|Today's Paper|Subscribe